Sell Stock or Not?
A friend has asked me about whether she should sell her stock now after the historical peak in 2006 winter for her stock.
About selling stock, need to know what kind of stock you are holding, if Chinese companies (except telecom stocks) like banks etc. should be safe (keep eye on news about macro econ control in china, probably in spring they will start… then be careful of Chinese stocks)
If you have a stock which you think you have earned enough, take China Mobile as example:
http://hk.finance.yahoo.com/q?s=0941.HK
You afraid it will fall but you also afraid it will rise further. Then the way to do hedging is to buy put option (認沽期權):
http://hk.finance.yahoo.com/warrant/warrant_callput.php?under_code=0941.HK
take this as example:
http://hk.finance.yahoo.com/warrant/warrant_details.php?s=6180.HK
Expired on 29th May 2007
Price 0.81 x 5000
Strike at 71.28
Current stock price is 67.4
That all means you pay $0.81 per share (need to buy 5000 each time = 0.81 x 5000 = $4050) so that you can sell your stock at $71.28 (x1000 = $71,280) on 29th May, which current price of $67.4 ($67,400).
$4050 is the insurance you need to pay (hedge your stock), you can seal the earning you have already got.
What happens if stock price increase:
Put option price decrease, until the stock rises to $71.28, mathematically option price becomes $0 (never goes negative), then your stock value would become $71,280
What happens if stock price fall:
Put option price would increase, mathematically, no matter how much the stock decrease, the put option price would increase so that people have stock and have the option can sell the stock at $71.28 on 29th May 2007
Sounds great?
However, something need to consider:
1, Transaction cost, since option price is relatively low compare with stock price, which means the % of transaction is higher.
2, Volume, don’t buy option has no transaction (same as stock), otherwise, when you want to sell, maybe no one buy…
3, Be careful if you buy one sided option (without stock on hand), you can buy call option to hedge against it~ (story is getting complicated)
In HK, the options for stocks are pretty limited, and I hope this example will give you idea of how to protect your investment no matter the market is up or down.
To be honest, I bought this one:
http://finance.yahoo.com/q?d=t&s=QQQRR.X
Put option for Nasdaq 100 index…. Since I have no feeling about all these historical record high…
More information and strategy: